Power Point explains Equity Indexed Universal Life Insurance: how it works & how it's used.(Adapted from CampIUL™ with permission of Gulf States Marketing)

1. Presented by
Al DeRemigis
www.sellmorelifeandannuities.com
Indexed Universal Life (IUL):
A Crash Course*
*adapted from CampIUL™ with permission of Gulf States Marketing ©2012
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2. Equity-Indexed Universal Life insurance, or Indexed
Universal Life (IUL), was developed in the late
1990’s and first introduced in 1997. Minnesota
Life, Transamerica and Amerus (now Accordia)
were the earliest companies to develop IUL’s as
part of their product portfolios.

3. More on IUL…
 Fox Business had this to say about IUL
recently: “An emerging and fast-growing
contract design — the indexed universal
life (IUL) policy — may come very close to
being the ideal contract for most
consumers in today’s interest and overall
market environment.”

4. Presently, there are more than 50 companies
offering IUL’s. According to LIMRA, IUL sales
grew by 192% from 2006-2010 and continue to
lead all products in year over year premium
growth.
IUL’s are growing in popularity and more and more
companies are adding them to their portfolio of
products.

5.  Can provide flexible premiums
 Provides death benefit at a possible lower cost than
other types of policies
 Opportunity to earn greater interest
 Protection against economic downturns

6.  It is illegal to market Index Universal Life
(IUL) as an "investment security", as defined
by the Securities Act of 1933 & the Securities
Act of 1934. However, IUL can be marketed
and sold as an investment.
 The single largest asset class of all but one
of the largest banks in the United States is
permanent cash value life insurance.
IUL as investment/asset
class

7.  Opportunity to “pay-up” a policy for guaranteed death
benefit
◦ Policy owner may choose to pay premiums until age 65, but have the
policy guaranteed to age 100 or beyond. Premiums amounts may change
depending on premium schedule.
 Opportunity to over-fund a policy to build cash value for
future use
◦ Paying premiums in excess of the cost of the coverage can help to build
cash value within the policy.

8.  Term life insurance policies provide a death benefit for specified
period of time, such as ten, twenty or thirty years
 Indexed Universal Life policies credit interest based off of a strategy
based on an index’s performance
 Universal Life credits their policies with a declared rate of interest
 Variable Universal Life policies participate in the market and cash
values and death benefit may increase or decrease accordingly

9.  a. Fixed accounts
◦ i. Credits a fixed rate of interest
◦ ii. Interest rate declared by insurance company
 b. Indexed strategies
◦ i. A formula to calculate interest credited to the life insurance policy
◦ ii. Interest credited is linked to the performance of one or more
indices but never invested directly into any market
 c. What is an index?
◦ i. Statistical model that measures the growth or decline of a
particular market
◦ ii. Examples of indices are the S&P 500, Nasdaq 100, The Dow
Jones Industrial Average and Hang Seng Index

10. S&P 500
◦ i. Published since 1957
◦ ii. Regarded as the standard for broad stock market
performance
◦ iii. The index focuses on U.S. based companies but there are
a few legacy companies with headquarters in other countries
◦ iv. The S&P 500 is the most widely followed index of large-cap
American stocks
◦ v. Represents approximately 70% of the total domestic U.S.
equity market’s capitalization
◦ vi. The companies of the S&P 500 are selected by committee

11. NASDAQ 100
◦ i. A stock market index of 100 of the largest non-financial
companies listed on the NASDAQ
◦ ii. Includes many major industry groups, such as, computer
hardware and software, telecommunications,
retail/wholesale trade and biotechnology
◦ iii. It does not contain financial companies, and includes
companies incorporated outside the United States
◦ iv. The exclusion of financial companies distinguishes it
from the S&P 500 Index

12. Dow Jones Industrial Average
◦ i. One of several indices created by Wall Street Journal
editor and Dow Jones and Company
co-founder, Charles Dow
◦ ii. It is an index that shows how 30 large, publicly owned
companies based in the United States have traded
during a standard trading session
◦ iii. Accounts for approximately 29% of the investable U.S.
market, as measured by the Dow Jones

13. Hang Seng
◦ i. A free float adjusted market capitalization weighted
stock market index in Hong Kong
◦ ii. The 45 constituent companies represent about 60% of
capitalization of the Hong Kong Stock Exchange

14.  Step one: Premium paid to the policy
◦ i. Premium goes into a basic interest strategy
◦ ii. Basic interest strategy holds the premiums to fund one
year of policy charges and cost of insurance

15.  Step two: Remaining premium
allocated into segments
◦ i. A segment is either one or a combination of fixed or
indexed strategies that you selected for a specific
segment term
◦ ii. A segment term is usually one, five or six years long
depending on the strategy selected and funds cannot be
redirected to different strategies until the segment term
matures

16.  Step three: Segment term ends
◦ i. Segment dollars are placed back into the basic interest
strategy
◦ ii. New premiums placed into basic interest strategy
◦ iii. Process begins again with funds kept in basic interest
strategy to pay for policy
◦ iv. Excess funds allocated to new segment with new
segment term

17.  a. Participation rate
◦ i. A percentage of the overall increase in the index
◦ ii. May vary from company to company and product to
product
Question: The S&P 500 increased by 10% from the
beginning of the interest crediting period to the end. The
participation rate of the chosen policy is 85%. What interest
is credited to the policy?
Answer: 8.5% because interested credited equals 10%
performance times 85% participation rate.

18.  b. Cap rate
◦ i. The maximum amount of interest a company will credit a
policy for a particular strategy and segment
◦ ii. Caps vary by strategy
◦ iii. Caps can be adjusted up or down at the beginning of each
interest crediting period
Question: The S&P 500 increased by 17% from the
beginning of the interest crediting period to the end. The
participation rate is 100%. The cap rate is 12.5%. What is
credited to the policy?

19.  Answer: 12.5% because at 100% participation
interest credited equals the lesser of the cap rate or
index performance.
 c. Interest crediting period
◦ i. Measured from the creation of the segment to the
segment anniversary
◦ ii. The time period used to calculate the interest credited to
the policy

20. Bob has an indexed universal life policy that has a
two year point-to-point strategy (discussed in next
section). The indexed used is the Nasdaq 100.
The participation rate for his strategy is 90%. The
cap for his strategy is 11.65%. The Nasdaq 100
increased by 11.95% over the interest crediting
period. What is credited to the policy?
Case study using all
components:

21. Case Study Answer:
 The index and strategy used are irrelevant.
Multiply participation rate times strategy
performance and crediting rate equals the lesser
of this calculation or the cap rate. In this case:
90% participation rate times 11.95% strategy
performance equals 10.755%. The cap for his
strategy is 11.65% and 10.755% becomes the
crediting rate because it is lower than the 11.65%
cap rate.

22.  a. 1-year point-to-point
◦ i. The interest crediting period is one year from the
creation of the segment and on each anniversary
thereafter
◦ ii. Interest credited is subject to the participation rate and
the cap
◦ iii. May be linked to any index, not necessarily the S&P
500

23.  b. 2 year point-to-point
◦ i. The interest crediting period is two years from the
creation of the segment and on each anniversary
thereafter
◦ ii. Interest credited is subject to the participation rate and
the cap
◦ iii. May be linked to any index, not necessarily the S&P
500

24.  c. Multi Indexed strategies
◦ i. Takes average of multiple indices
◦ ii. May be a monthly average or annual average
◦ iii. Subject to participation rate and cap
 d. One year monthly cap
◦ i. Interest measured monthly
◦ ii. Index increases capped
◦ iii. Index decreases not capped
◦ iv. 12 months of index measurements added together to
determine interest credited to policy
◦ v. Subject to participation rate and cap

25.  e. One year monthly average
◦ i. Indexed measured on a monthly basis
◦ ii. 12 months’ average growth is calculated to determine
annual interest credited to the policy
◦ iii. Subject to participation rate and cap
 f. Strategy availability
◦ i. Varies by company
◦ ii. One year point-to-point is most common and often only
strategy offered

26.  a. Tax free death benefits
◦ i. The recognized public benefit of life insurance has led
to the favorable tax treatment of life insurance policies
◦ ii. Most life insurance death benefits are income tax free
◦ iii. If the policy is transferred for value, the portion of the
death benefit that represents a gain may be taxed

27.  b. Tax advantaged loans to supplement retirement
◦ i. Must meet certain guideline premium or cash
accumulation test
◦ ii. Cash accumulation test not allowed in Florida
◦ iii. Policies that fail either of these test may lose favorable
tax treatment
◦ iv. Policies that fail either test are considered Modified
Endowment Contracts, “MEC’s”, and are taxed as a
interest first in the same fashion as annuities

28.  a. Cost of Insurance
◦ i. Actuarial calculation
◦ ii. Based on age and sex
◦ iii. Also based on risk rating
 b. Other expenses
◦ i. Premium expense charge
◦ ii. Annualized policy fee
◦ iii. Policy expense charges
◦ iv. Rider expenses
◦ v. Surrender charges

29.  1. Over-funding
◦ a. Premium in excess of the requirement to keep the
policy in-force
◦ b. Excess premium is allocated to the interest crediting
strategies
◦ c. The purpose is to accumulate cash value within the
policy

30. John wishes to pay $400 per month into an indexed
universal life insurance policy. John is 30 years old and in
excellent health. He needs some insurance to replace his
income with the beneficiary being his wife. However, he
would like only a minimal amount of death benefit with the
ability for the life policy to grow cash value for future use.
He wants at least $185,000 in death benefit with any
remaining premium going towards building cash value. It is
determined his current cost of insurance is $1.00 per
thousand annually. The annual policy fee is $96 and the
premium expense charge is $180. In addition there is a
policy expense charge of $400. What portion of his
premiums will be credited to his chosen index strategy?
Case study using all
components:

31. Case Study Answer:
 To solve this case first convert all expenses to
monthly amounts -
 Cost of Insurance: ($1.00 per thousand
annually) 186 X $1.00 = $186 per year/12=
$15.50 per month
 Policy Fee: $96.00/12 = $8.00 per month
 Premium Expense Charge: $180/12 = $15.00
per month
 Policy Expense Charge: $400.00/12 = $33.33
per month
 Then, subtract the sum of all monthly charges from
the monthly premium payment – ($400.00 less
$15.50+$8.00+$15.00+$33.33) = $328.17 excess
monthly premium will be credited to chosen index
strategy.

32.  2. CVAT
◦ a. What is it?
 i. Cash value accumulation test
 ii. A relationship between the cash value of a policy and the
death benefit
 iii. The test will limit the amount of cash value in a policy in
relation to the death benefit or, conversely, increase the
death benefit to allow for the increase in cash value
◦ b. CVAT not available in Florida
◦ c. Useful for policies where cash accumulation is a
concern
Cash Value AccumulationCash Value Accumulation
TestTest

33.  3. Guideline Premium Test (GPT)
◦ a. Determines premium amounts based on the death
benefit chosen
◦ b. Limits both the premiums that can be paid in and the
cash value that can accumulate
◦ c. Useful test to determine maximum death benefit per
premium dollar paid
Guideline Premium TestGuideline Premium Test

34.  4. Modified Endowment Contract (MEC)
◦ a. What is it?
 i. A life insurance policy can be determined to be a MEC if it fails
either the GPT or CVAT
 ii. Uses CVAT and GPT to prevent policy owners from making
large single premium payments for the purpose turning life
insurance policies into tax sheltered investment vehicles
◦ b. How does it affect access to the cash value?
 i. Prevents the policy owner from withdrawing cash from the policy
under the more favorable cost recovery rules
 ii. Cash withdrawn is considered an interest first withdrawal, as in
the case of an annuity
Is MEC a bad word?Is MEC a bad word?

35. John and Robert are brothers who have each received a $100,000 death
benefit from a parent’s indexed universal life insurance policy. Seeing the
value of life insurance, they both decide to purchase life insurance for
themselves for the benefit of their families. John decides to over-fund an
indexed universal life policy with substantial annual premiums, hoping to
build cash value to use later in life while still providing a sizable death
benefit to aid his family in the event of his death. John’s financial
professional tells him that the life insurance policy will not be considered a
MEC due to him making premium payments over time. Robert also wants to
purchase an indexed universal life policy for the same reasons as John.
However, Robert is adamant that he only make one lump sum payment and
be done with it. His financial professional informs him that his policy will be
considered a MEC.
Case Study for MEC:Case Study for MEC:

36. 1.What are the possible tax consequences if John
wishes to take a loan from his policy to purchase a
new car?
2.What will be tax implications of the death benefit to
John’s heirs in the event of his death?
3.What are the possible tax consequences if Robert
wishes to take a loan from his policy to purchase a
new car?
4.What will be tax implications of the death benefit to
Robert’s heirs in the event of his death?
Case Study Questions:Case Study Questions:

37. Case Study Answers:
 1. Under current tax law loans from non-MEC
cash value life insurance are tax-free distributions.
 2. Under current tax law life insurance death
benefit proceeds are income-tax free.
 3. Under current tax law loans from MEC cash
value life insurance is taxable income.
 4. Under current tax law life insurance death
benefit proceeds are income-tax free. (Even if it is
a MEC)

38.  a. Fixed loans
◦ i. Can be taken out against the cash value of your policy
◦ ii. Charged a fixed rate of interest until paid back into the
policy
◦ iii. Amount of loan is usually deducted from the interest
crediting segment and will not be considered to earn
interest

39.  b. Premium loans
◦ i. A type of fixed loan
◦ ii. Usually available after the policy is in effect for a
certain amount of years
◦ iii. Sometimes called a “wash loan”
◦ iv. May not charge interest
Loans (Continued):Loans (Continued):

40.  c. Variable loans
◦ i. Can be taken out in relation to cash value available
◦ ii. Based off of a nationally/internationally posted loan
rate
◦ iii. Amount of loan remains in segment for interest
crediting purposes
◦ iv. Possibility for positive arbitrage situation
◦ v. Loan will accrue interest until paid back into the policy
Loans (Continued):Loans (Continued):

41.  1. Level death benefit
◦ a. Most familiar
◦ b. Provides a consistent death benefit for the life of the policy
unless either CVAT or GPT require it increases
 2. Increasing death benefit
◦ a. Includes a specified amount
◦ b. Plus all or a portion of the accumulated value
 3. Return of premium death benefit
◦ a. Includes a specified amount
◦ b. Plus the premiums paid into the policy

42.  1. Individual/Family purpose
◦ a. Income replacement
◦ b. Spousal support
◦ c. Child support
◦ d. Charity endowment

43.  1. Accelerated Death Benefit rider
◦ a. Triggered by diagnosis of terminal illness
◦ b. Pays a portion of the death benefit while insured is alive to help
with living and health expenses
 2. Waiver of surrender charges due to confinement
◦ a. Can allow a policy holder to withdraw an increased amount of
the cash value without incurring a surrender charge
◦ b. May require an elimination period
 3. Additional insured rider
◦ a. Used primarily to cover a spouse
◦ b. Provides level term insurance to the additional insured

44.  4. Child rider
◦ a. Can be purchased on a minor child
◦ b. Provides level term coverage
◦ c. May be convertible to a permanent policy
 5. Accidental death benefit rider
◦ a. Can provide policy with additional coverage
◦ b. Death must be deemed an accident by language of
contract
Riders (Continued):Riders (Continued):

45.  6. Waiver of specified premium
◦ a. Company will waive payment of specified premium
due to disability
◦ b. May require an elimination period
◦ c. Company may credit policy with specified premium
during waiver period
 7. Death benefit return of premium rider
◦ a. Designed for some split dollar and premium finance
cases
◦ b. Will return 3rd party financier premiums paid in while
death benefit is paid to named beneficiaries
Riders (Continued):Riders (Continued):

46.  1. How does an indexed universal life insurance
policy accumulate cash value?
◦ a. Over-funding
 i. Premiums paid into the policy exceed requirements to pay
the cost of the policy
 ii. Premiums must not exceed GPT or CVAT limits
◦ b. Interest crediting strategies
 i. Excess premium is put into interest crediting segments
 ii. Positive performance of the interest crediting strategy
increases the cash value of the policy
 iii. Minimum crediting guarantees within the policy help to
minimize index downturns

47.  1. Helping clients provide for their loved ones and
obligations in their absence.
 2. Additional uses of cash value:
◦ a. Personal bridge loans
◦ b. Emergency funding
◦ c. Down payments
◦ d. Educational funding

48.  If you are ready to increase your income significantly
this year and want to take the next step in your career
by adding IUL to your portfolio contact:
Al DeRemigis
410-905-2492
al@sellmorelifeandannuities.com
www.sellmorelifeandannuities.com
www.linkedin.com/in/alderemigis